What Happened Last Week
- Poor Sentiment: Volatility in crypto, stocks, and metals dampened investors’ risk appetite early last week.
- Legacy Software Concerns: The release of a new AI coding tool led investors to question the viability of certain software platforms, and weighed on the complex.
- Risk Reversal: Markets got a broad-based lift from dip-buyers on Friday after several volatile sessions.
What We’re Watching This Week
- Earnings Week Five: A host of popular retail names are updating investors this week.
- Economic Data: Three closely watched economic releases this week will color investors’ view of the U.S. economy for early 2026.
- Positioning: Software stocks, crypto, and metals will be closely watched for signs that the positioning unwind has more room to go.
Investment Management Team’s Views
Last week’s volatility reflected a familiar post-Covid pattern of crowded positioning and rapid reversals. A sharp month-end decline in gold and silver set a cautious tone, which intensified after new AI announcements revived concerns about the long-term viability of legacy software business models. Pressure from crowded software trades has spread to concerns about leveraged funding channels, including loans and private credit. By Thursday, positioning stress overwhelmed markets, with growth and tech leading equities lower and retail-heavy assets like Bitcoin posting their largest single-day decline since August 2024.
Friday’s snapback made clear that last week’s move was about positioning rather than fundamentals, with an oversold market igniting a fast-money, leverage-driven rebound rather than any new information. In the end, the S&P 500 closed essentially flat on the week. We view the episode as largely noise rather than a cause for concern. The macro backdrop remains constructive, supported by solid earnings, improving economic data, and the prospect of additional fiscal and potentially monetary support ahead of the midterms. While heavy Mag 7 concentration limits headline index upside without renewed tech leadership, strength in the average large-cap stock, small-caps, and international equities, all at fresh highs, reinforces our view that diversification will continue to be rewarded.
The coming week features three top-tier economic releases that will test the market’s evolving policy framework. Retail sales for the critical December period, January’s Consumer Price Index (CPI), and last week’s delayed January jobs report would typically offer a clean read-through to rates, but the market is still recalibrating to expectations around a Warsh-led Fed. Retail sales will gauge consumer resilience, while CPI and payrolls will inform progress on inflation and the cooling of the labor market. With policy uncertainty elevated, markets may react less to the data itself and more to what it implies about the Fed’s tolerance for growth and inflation, making these releases particularly important for positioning across rates, currencies, and risk assets. Earnings from several retail-focused names will provide an additional read on risk appetite following last week’s volatility.